Angel Investors heave a sigh of relief as Indian government scraps ‘angel tax’ imposed on seed funding

In line with the government’s recently announced policies related to startups and entrepreneurship, the Indian government has now announced that it has decided to axe the so-called “Angel Tax“.

It looks like that the move is aimed to boost entrepreneurship in order to create more job opportunities in the country. Now, funding to the startups will not face tax, even if its exceeds the face value. However, tax officers can still question earlier investments as being overvalued due to the declining valuations.

The tax provision for seed funding treated infusion of funds by domestic angel investors as income in the hands of the start-up. Hence, making India the only country in the world to penalize local angel investors in such manner.

Under existing rules, funds raised by an unlisted company through equity issuance are covered under this tax. It is covered to the extent that the amount in excess of the fair market value is also liable to taxation.

Those who are not registered as venture capital firms can now heave a sigh of relief. They no longer have to worry about their investment getting taxed. It includes resident angel investors, domestic family offices and also domestic funds.

The extra inflow is taxable as “income from other sources” under Section 56(2) of the Income-Tax Act. Thus, it charged the corporate tax rate, which is resulting in tax of over 30%. Thus, the VC firms have been lobbying for removal of this tax.

The valuation of an early stage startup, or any startup for that matter, is in excess to the market value. This is because it is based on the promise of the idea and its potential, instead of the immediate worth. In such a case, the startup would end up losing a chunk of the inflow to this ‘angel tax’.

Thus, the Central Board of Direct Taxes has issued a notification to this effect, exempting startups raising investments from the rigours of Section 56 (2) (viib).

The investors are happy with this new step taken by the government. They are welcoming this move, which has been a long-standing demand from them.